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Spanish Bonds

By   /   June 15, 2012  /   No Comments

Spanish bonds: 10-year yields were reported by MarketWatch to have broken the 7 per cent mark at around 9.55am GMT.

This milestone would see returns easily surpass their previous peak of 6.7 per cent in late November 2011 to a height not seen since the introduction of the Euro, and represents a further problem that the Eurozone has to overcome. For good reason, the Greek elections were always going to lead headlines this week. However, this latest chapter in the Spanish saga represents something far more dangerous than the victory of anti-austerity parties in Greece this weekend.

Spain is not Greece. There may be said to be ‘lies, damn lies, and statistics’ but a few seem worth mentioning.

  1. Spanish youth unemployment is now over 50%.
  2. Spain’s economy is the fourth largest in the European Union, Greece merely the fifteenth.
  3. Spain’s debt to GDP ratio is rapidly approaching parity, and is becoming ever harder to service.

Spanish private sector growth has rarely been so important. However, with house prices still tumbling, homeowners find their wealth decreasing and are understandably cautious of spending with precarious household finances. One thing is for certain, the possibility of any sort of counter-cyclical injection becomes harder as Spanish public finances continue to deteriorate. Moody’s has downgraded Spanish debt to just one notch above ‘Junk’ status, and no-one quite knows where the good news that will signal the trough of the situation is going to come from.

From an investor’s perspective, the recent €100 billion injection not only highlights how panicked Spanish authorities are at this stage, but also puts investors even lower in the repayment pecking order should Spain default on its national debt, with the ESM rescue fund now the first in line.

In addition, the recent developments underline one of the most important rules that investors must always keep in mind; valuations are the aggregation of human, and therefore intrinsically flawed thinking. It is not the likelihood of Spanish government debt default that sets market bond yields, but what everyone thinks that everyone else thinks is the likelihood of a Spanish government debt default. Unfortunately, it seems that the €100 billion of funds has done more harm than good to public perception.

Photography attributed to: Contando Estrelas / Foter

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